Rising federal budget deficits are posing a significant threat to the U.S. economy and are likely to cause a crisis if not brought under control, Federal Reserve Chairman Ben Bernanke told Congress Thursday.
Calling the situation "unsustainable," the central bank leader pointed out that surging health-care costs, along with the high level of government spending used to pull the economy out of recession, are creating fiscal hazard.
"Having a large and increasing level of government debt relative to national income runs the risk of serious economic consequences," Bernanke told the House Budget Committee. "Over the longer term, the current trajectory of federal debt threatens to crowd out private capital formation and thus reduce productivity growth."
At the same time, he also warned Congress not to pull the reins too tightly so as to threaten growth.
The Fed, following its meeting last week, stopped short of announcing another round of asset purchases, commonly known as quantitative easing.
Bernanke reiterated that stance, as well as the central bank's intention to keep its targeted funds rate near zerothrough late 2014.
The comments did little to move stocks but reverberated through the commodity markets, where gold and silver hit sessions highs as traders bet that a cheap U.S. dollar would push metal prices higher.
"While conditions have certainly improved over this period, the pace of the recovery has been frustratingly slow, particularly from the perspective of the millions of workers who remain unemployed or underemployed," he said. "Moreover, the sluggish expansion has left the economy vulnerable to shocks."
Unemployment has improved but remains at 8.5 percent, a level likely to hold when the government releases its January jobs report on Friday.
Bernanke faces a Republican-controlled House whose leadership has been critical of the Fed's monetary policy and the risk it poses to inflation. The Fed's Open Markets Committee statement exacerbated those concerns when it stated the central bank would be willing to accept some inflation over the short term in an effort to grow the economy and bring down unemployment.
"We are not seeking higher inflation, we do not want higher inflation and we will not tolerate higher inflation," Bernanke said in response to a question from committee Chairman Paul Ryan, a Wisconsin Republican.
The Fed's balance sheet stands at $2.9 trillion, swelled by purchases of assets such as Treasurys and mortgage-backed securities. The goal of quantitative easing has been to bring down interest rates and encourage investors away from low-yielding fixed-income vehicles and into higher risk such as stocks and real estate.
The stock markethas wiped out much of its losses during the financial crisis, but housing remains mired at Depression-era levels.
"Although low interest rates on conventional mortgages and the drop in home prices in recent years have greatly improved the affordability of housing, both residential sales and construction remain depressed," Bernanke said.
But Ryan pinned blame on the Fed for its easy-money policies in the last decade as the root cause for the current lag.
"A lot of us believe the Federal Reserve was too loose for too long in the 2003 to 2005 period and that in part was what led to the asset bubble and the malinvestment that occurred and the problems we have today," he said. "I know you don't agree with that. But because you don't agree with that, our fear is that you're just going to repeat these same mistakes again but by orders of magnitude that we can't even comprehend right now."
Ryan also said the Fed's policies are hurting savers by keeping rates so low, and cautioned the chairman against trying to "bail us out" in Congress and its actions that have led to the high budget deficit, expected to be near $1.1 trillion in 2012.